The mortgage crisis shifts to the FHA and Congress wants to make the problem permanent

11/20/2009 12:10 pm EST


Jim Jubak

Founder and Editor,

Another of the “emergency” measures enacted to stop of the financial crisis from plunging the economy into a depression looks like it’s on the road to becoming “permanent.”

And this one could really blow up on us taxpayers—again—not so far down the road.

I’m talking about the “emergency” change in the rules for Federal Housing Administration (FHA) qualified loans that let the agency insure housing loans for as much as $729,000. The temporary change went into effect in two stages in March 2008 and in February 2009. Up until then, the FHA could not insure loans of more than $362,790. That lower limit was in line with the agency’s original mission of helping low-income families who couldn’t make the traditional 20% down payment required by private lenders get a mortgage.

The logic of the higher “temporary” limit was that the FHA would now be able to insure loans in the hard-hit, high-priced housing markets of states like California. The higher limits would enable buyers in these markets to get loans to buy houses that would otherwise sit unsold. The loans would thus support housing prices and the home building industry in high-priced real estate markets.

The FHA has certainly insured lots of loans in these markets. So far in 2009, the agency has insured 107,000 loans in California alone.

The higher “emergency” limits were set to expire at the end of this year but at the end of October Congress voted to extend them until December 2010.

And Representative Barney Frank (D-MA), chairman of the House Financial Services Committee, has said that he will introduce legislation in 2010 to raise the limit another $100,000 to $839,750 and make it permanent.

If you were cynical about such things (which, of course, I’d never be about anything that happens in Washington), you could say that the “emergency” has become “permanent.”

The big problem with this is that by raising the size of the loan that the FHA can insure Congress has thrown the agency to the wolves. And the wolves are busy eating the agency alive. By pushing the agency into the high-end of the mortgage market and making it possible for buyers to put as little as 3.5% down, Congress made sure that the agency would wind up insuring a lot of high-risk mortgages and that default rates on FHA-insured mortgages would skyrocket.

According to the figures released by the Mortgage Bankers Association on November 18, one out of every six FHA-insured mortgages is behind by at least one payment and 3.32% are in foreclosure now. In comparison for all types of mortgages 9.64% were at least one payment overdue at the end of October and 4.7% were in foreclosure. For prime fixed rate mortgages, theoretically the least risky part of the mortgage market, the delinquency rates was 5.8% and the foreclosure rate of 1.95%.

Optimistic taxpayers might be able to wring some consolation from the fact that FHA-insured mortgages are going into delinquency and default at a lower rate than mortgages as a whole. Except that even this lower rate is enough to push the agency to the edge of a taxpayer bailout. The FHA’s reserve ratio is now down to 0.53%, the lowest level in history. That’s scary considering that the agency insures 20% of all single-family mortgages and that the default and foreclosure rate is expected to keep climbing well into 2010 (if not beyond.)

But don’t worry, says Obama administration Secretary of Housing Shaun Donovan: The quality of loans insured by the FHSA is “actually very good” and those predicting that the FHA is about to turn into a version of the subprime-mortgage crisis are “dead wrong.”

Reassured? Me neither.

To me it looks like Congress and the Bush and Obama administration, once again, found an “emergency’ solution that pushed the bill for damages from the private sector to the taxpayer. And that bill is now coming due.

Exactly the kind of thing you’d like to make permanent, right?
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